The Russian retail sector is enjoying a period of unprecedented growth, attributed in the main to the continued rise of the Russian middle class, which is forecast to triple from 20m to 70m people by 2020, resulting in a doubling of disposable incomes. It’s easy to understand why international brands are taking a more aggressive approach to entering this territory, a move that is having a direct impact on the attitudes of Russia’s domestic brands.
Russia is one of the largest retail markets, but is underperforming against the European average in terms of retail spend per capita, so there is an obvious potential to exploit. In 2011 Russia had retail sales of US $431bn, but trails other markets in per capita spending at US $3,000, half the Western European average of US $5,770. International brands see a huge potential for growth. With their traditional markets reaching near saturation, they believe Russia to be a natural extension of their retail empires. These are compelling reasons to overcome the bureaucratic, cultural and logistical barriers to trade.
In the region, sophisticated international brands,such as Zara, Topshop, M&S and H&M are highly desirable – easily charming the local consumer with their confidence and design awareness and, as we know, the Russian consumer loves a good brand. As such they are a huge cause for concern in a market where, in the past, the local players had little to do to attract new custom. In this market, only recently coming out of Soviet-era market trading, and depressing state-owned department stores, new players are a wake-up call anda catalyst to Russian retailers’ new interest in design and what it can offer.
There are myriad reasons why Russia finds itself where it does today, but in the area of design we can directly see the context. Before 1991 products and services were state-owned, with little choice and poor quality. This lack of competition offered no reason to create brands as we understand them today; the Lada characterised the manufacturing of the Soviet era – a small cheap car that was introduced in 1970 and became a symbol of Russian functional design and frugality. In the West we have had greater choice, and an ever more empowered shopper, while in Russia the predisposition to a controlled economy, with a lack of choice, a poor service culture and an acceptance of poorer-quality products, has lingered.
While the Russian retail brands have a lot of catching up to do, the challenge is how this is dealt with – simply copy the incoming threats and adopt global best practice or learn from this and create something culturally relevant for the Russian consumer? We believe it’s a balance between international best practice and the need to create brands that truly evoke the rich social and cultural heritage that Russia exudes. The consumer has seen what good service and good design can offer and is increasingly sophisticated in their taste. This new middle class is maturing quickly and will soon be just as demanding as their Western contemporaries. So the message is clear to incumbent brands: shape up and listen to your customer and craft your offer to measure up to the unstoppable march of the western brand. In short, deploy design to enable your retail re-birth.
The incumbent brands do, however, have a home advantage. Barriers to trade are higher here than in many other regions, with vast distances to navigate.If you have ever travelled by car in Russia you willunderstand the issues for logistics – chronic underinvestment in road infrastructure means a journey can easily take two or three times longer thana comparable journey in the West, not to mentionthe constant congestion around the country’s capital. There are vast cultural shifts and distances to understand; it’s 9,080 km from Vladivostok on the eastern coast on the Sea of Japan, to the country’s more cosmopolitan capital, Moscow.
Bureaucracy and corruption are an ongoing issue, but hopefully in the wake of the Sochi Winter Olympics in February 2014, and the 2018 Football World Cup, there will be the political will to challenge these issues. Issues of trust further muddy things. For example, with rising incomes and improving economic conditions, Russian consumers have boosted their savings, but they continue to be mistrustful of banks and often keep cash at home. A further consequence of mistrust is low credit-card ownership. Currently Russian credit card ownership is four times lower than the world average, according to Euromonitor. So, cash on delivery is commonplace for any internet purchase, which has an impact on the percentage of refusals and returns on delivery fulfilment of items ordered online. Often items are ordered at the beginning of the month when cash is plentiful, but due to slow delivery, by the time they arrive the money is gone – yet another barrier to new international players.
This financial situation is reflected in the in-store shopping and customer experience. The idea of using design to benefit the in-store environment – except by the more premium of brands – has, until recently, not been seen as a business tool. The fundamental appreciation of design to improve any experience is just beginning to make its mark, as the economy and consumer start to become freer.
It’s only now we are seeing a desire to truly service the customer and create engaging experiences. Completion of recent Russian projects is key to our understanding of this complex region, its customer shopping habits, culture, behaviours and aspirations. There is still much to learn, but we continue to absorb knowledge from our travels across this vast country and from our client relationships.